Think before lending to children and grandchildren

If you have saved over the years and even if you have only a few thousand in the bank above your living expenses, you might at some point be approached by an adult child or college-aged grandchild for a loan or, what sometimes might be even more dangerous, co-signing on a loan or credit application.

Parents sometimes have little choice regarding college loans, but grandparents are sometimes requested to co-sign loans by grandchildren, and this might be where the line would be drawn. Student loans are typically not even dischargeable by bankruptcy.

Here is some information and advice you could use before deciding whether to lend money or to co-sign on a loan.

• You need to decide whether you are making a loan or giving a gift. A loan has a realistic expectation for repayment. If you are “lending” money to an adult child, grandchild or even a friend, you need to decide in advance and realistically whether you expect repayment and on what terms. If you do not, you could be setting yourself up for serious disappointment. In the 17th century, Shakespeare made the statement in Hamlet, “(n)either a borrower nor a lender be.” In today’s terms, we might just say to think through the possibilities.

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If your loan is really a gift and you can afford to give, then you might just acknowledge it as such and move on. If you want to be repaid, then you need to think it through and provide structure.

• If you are lending money, establish how it is to be repaid. A loan, even among family members, should be in writing with dates, amounts and manner of payment. It should also contain an amortization schedule showing how much remains on the loan after each payment, final payment date, and provisions regarding interest. It should be signed by the parties and at least witnessed if not notarized. It needs to be realistic. Where there is massive debt with no likely source of repayment in sight, a relative might do better consulting a bankruptcy attorney.

There are other means for repayment. Sometimes parents designate that the loan is to be deducted from that child’s share of inheritance after the parent dies. I am not a fan of this arrangement because papers can get lost, parents may change their minds later and the repayment comes many years after the fact. However, for some people it works.

Loans, of course, could also be from children to parents. If the parent owns a residence with sufficient equity, one technique our office often uses is to prepare a note with a private reverse mortgage to the adult child, record it on the property and provide for payment to the adult child when the parent’s house is sold. The same technique could be used for parents lending to an adult child who owns a property with equity.

• You need to know the downside of co-signing on a loan. Grandparents, especially, who are asked to co-sign a loan, especially a student loan, should think long and hard before doing so. As stated previously, parents might have little choice for student loans. However, we have seen cases of grandparents who are asked to sign and sometimes with tragic results. Here is why:

Grandchildren may be at a stage in life where they have not yet decided where they want to go. The grandparent, wanting to please and thinking their grandchild is primarily liable, might be convinced to sign. The funds might be substantial and might be needed for the grandparent’s own support. If the grandchild has a change of mind and decides, for instance, to drop out of school, discontinue classes, move to another school or move out of an apartment before the lease has ended and discontinue rent payments, the grandchild may feel no longer responsible for the debt. They might also lack a job and the funds, even if they want to repay the debt.

Co-signers are equally responsible on the loan, and lenders might proceed directly against the co-signer as the more responsible party.

When approaching lending, consider the alternatives and have a plan. It can be a wise choice in the right case, but it requires advance preparation and thought.

— For more, listen at 4:30 p.m. Wednesdays to radio WCHE 1520 “50+ Planning Ahead” with Janet Colliton, Colliton Law Associates, and Phil McFadden, Home Instead Senior Care. Janet Colliton limits her practice to elder law, life-care and special-needs planning, Medicaid, estate planning and administration, and guardianships. Colliton Law Associates PC is at 790 E. Market St., Suite 250, West Chester, PA 19382, 610-436-6674, colliton@collitonlaw.com. She is also, with Jeffrey Jones, CSA, co-founder of Life Transition Services LLC, a service for families with long-term care needs.